Double materiality is a concept introduced in the CSRD that requires companies to consider and report on both financial and environmental/social impacts.

Traditionally, materiality in financial reporting focuses solely on information that could influence investors’ decisions.

Double materiality broadens this perspective by adding a second dimension: the impact of the company’s activities on society and the environment.

Financial Materiality

Financial materiality remains a critical component, requiring companies to disclose information that affects their financial performance and position. This includes risks and opportunities related to sustainability that could impact the company’s value, such as regulatory changes, market shifts, and resource availability.

Environmental and Social Materiality

Environmental and social materiality, the other dimension of double materiality, compels companies to disclose how their operations impact the environment and society. This encompasses a wide range of factors, such as greenhouse gas emissions, resource usage, labor practices, and community relations. Companies must report on their contributions to climate change, biodiversity loss, human rights issues, and other societal impacts.

The introduction of double materiality is a game-changer for corporate sustainability reporting. Here are some key reasons why it is important:

Holistic Reporting

Double materiality promotes a more comprehensive view of a company’s impact, encouraging transparency about both financial and non-financial factors. This holistic approach ensures that stakeholders, including investors, customers, employees, and communities, receive a fuller picture of a company’s performance and impact.

Enhanced Risk Management

By considering environmental and social impacts, companies can better identify and mitigate risks. For instance, a company heavily reliant on water resources might identify risks related to water scarcity and take steps to manage them, thereby safeguarding both its operations and the surrounding communities.

Improved Accountability

Double materiality holds companies accountable for their environmental and social impacts. This accountability drives companies to adopt more sustainable practices, leading to positive changes in their operations and contributions to global sustainability goals.

Informed Decision-Making

Investors and other stakeholders can make more informed decisions based on comprehensive data. Understanding both the financial and non-financial impacts of a company’s activities enables better assessment of long-term viability and ethical considerations.

While the benefits of double materiality are clear, its implementation poses several challenges:

Data collection and reporting

Collecting accurate data on environmental and social impacts can be complex and resource-intensive. Companies need robust systems and processes to gather, analyze, and report this information.

Standardization

Standardizing the metrics and methodologies for reporting on double materiality is crucial. Consistent and comparable data ensures that stakeholders can accurately assess and compare companies’ sustainability performance.

Regulatory compliance

Adapting to new regulatory requirements under the CSRD requires significant effort. Companies must stay informed about evolving regulations and ensure their reporting practices comply with the latest standards.